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Pre-pack administrations

Pre-pack administrations

The legal world felt a tremor last week when top100 firm Cobbetts, based in Manchester, went into administration.

News of their financial troubles appears to have come as a shock to many. According to Cobbetts, last week’s announcement was due to poor trading results during the final months of 2012, but the ‘Law Gazette’ report that last month the firm had said its half-year results showed a ‘steady ship’, with fee income of around £20m consistent with the previous year. ‘Legalweek’ report that last month Cobbetts signed a debenture with Lloyds TSB, effectively securing all its debt and future debt to the bank.

A saviour was quickly on the scene. Just three days after Cobbetts filed notice to appoint administrators in the Royal Courts of Justice, fellow Manchester based firm DWF agreed to rescue them in a pre-pack deal. The two firms had previously held merger talks, but these were abandoned a year ago, amid ‘uncertain market conditions’.

This will be a worrying time for many members of staff. Cobbetts was a full-service firm, currently with 492 staff, of whom 74 are partners and half are fee earners, based across Birmingham, Leeds, London and Manchester. Their finance litigation practice and debt recovery team Incasso will not join the rest of the firm when it moves to DWF, but it must be expected that DWF will make staff cuts to rid itself of overlap. DWF has said that it will honour all Cobbetts’ training contracts – including those who had agreed positions but were yet to start at the firm – as part of the pre-pack deal.

For the uninitiated, a pre-pack administration involves the sale of an insolvent company’s business and assets, at a price which is agreed, before the company goes into administration. The sale is then carried out immediately after the administrator is appointed. In 2011, the Insolvency Service estimated that 25 per cent of the 2,808 companies that entered administration in 2011 used the pre-pack procedure; and that nearly 80 per cent of pre-pack sales were to connected parties.

But pre-pack administration deals have been called into question by MPs over their lack of transparency. Last week a Commons Select Committee published a report on insolvency which includes a warning that there are “concerns” with pre-packs and calling for greater openness and higher levels of compliance to make sure rules are not being abused.

The Committee reported: “Proponents of pre-pack administrations argue that they preserve jobs and provide for the effective economic recycling of assets. However, that is disputed by a range of organisations. We therefore recommend that together, the Department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.”

The report goes on to say: “In May 2009, our predecessor Committee expressed concerns about the lack of transparency, resultant abuse of pre-pack administrations and their link to ‘phoenix companies’. Despite the introduction of Statement of Insolvency Practice Note 16 and additional guidance, pre-pack administrations remain a controversial practice.” Accepting that the Insolvency Service is committed to continue to monitor SIP 16 compliance, the report adds “but to make this effective, non-compliance needs to be followed through with stronger penalties by way of larger fines and stronger measures of enforcement.”

“Pre-pack administrations continue to cause concern,” said Select Committee chairman Adrian Bailey MP, adding: “Greater transparency, higher levels of compliance, and a stricter regime of sanctions are needed.”

The full text of the relevant part of ‘Business, Innovation and Skills Committee – Sixth Report’ is at:
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/675/67507.htm

This post was written by:

- who has written 462 posts on Upper Case – The Anya Legal Journal.

Mike Gribbin is a retired Civil Servant with wide experience, including the drafting and implementation of Parliamentary legislation and regulations. He is the editor of “Criminal Offences Handbook”, a uniquely comprehensive guide to more than one thousand ways to fall foul of UK criminal law. He is Editor of the Upper Case Legal Journal and has been writing blog posts for the past eight years.

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One Response to “Pre-pack administrations”

  1. Lloyd Green says:

    Pre-pack administrations often have a whiff of something not quite right or fair about them. However, given the chaos that can ensue when a law fir, especially a big one, goes under, this is a classic example of how they can apparently work in a way which is best for all concerned.

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